6 Bold and Creative Techniques for Supply Chains to Weather a Stormy Market

What would you have done with your supply chain in 2007 if you knew what was about to transpire in 2008/9?

The Institute of Supply Management (ISM) data shows that the US manufacturing index has been below the break-even level for three consecutive months after thirty nine months of growth. Will the trend continue? If so, how long and will it get worse? Is the slowdown in China going to have a significant impact on the rest of the world? It remains to be seen.

It’s déjà vu all over again and perhaps the third time since the turn of the century for the global economy to tread water and decline. How are companies dealing with this? The least mature organizations will wait and just react – it will be ugly. Leaders have begun to orchestrate their entire value chain and make changes now that will provide buffer during the downs and catapult them out when growth resumes. Existing Gartner clients can read: Gartner’s Demand-driven Value Network Maturity Model.

What role should the Chief Supply Chain Officer (CSCO) or head of supply chain undertake to stay ahead of the storm?

 

IBM

The Great Depression of the 1930s presented an “unprecedented economic challenge, and Thomas Watson, Chairman of IBM, met the challenge head on, continuing to invest in people, manufacturing, and technological innovation despite the difficult economic times. Rather than reduce staff, he hired additional employees … – not just salesmen … but engineers too.” (Wikipedia)

The trajectory that IBM had after World War II catapulted them ahead of the rest of the industry. It took many technology disruptions, including one that IBM created themselves, and nearly 50 years for IBM to relinquish its position as the world’s most dominant technology company.

What lesson does this provide for supply chain organizations today? Does the IBM approach to difficult economic times suggest an alternative universe of solutions? Was Thomas Watson the first Mode 2 Jedi?

At Gartner, we use the concept of a bimodal supply chain to distinguish between the daily operations of a business from the more strategic view of the future. “Mode 1” is defined as traditional state of supply chain and the everyday drill of cost reductions, delivery performance improvements, and the usual culprits of operational performance. “Mode 2” is an exploratory state, driven by innovative approaches, changes in the market, growth opportunities, and new models of business that impact supply chains. Watson was clearly in a Mode 2 conviction after the stock market crash. “Damn the torpedoes, full speed ahead!” (Admiral David Farragut). Existing Gartner clients can read: Gartner’s Disrupt or Be Disrupted – Defining the Bimodal Supply Chain.

 

Risk / Reward

Too often we’ve seen dramatically poor forecasts. While forecast accuracy is an interesting concept, when it comes to market dynamics, we have to consider whether we are inclined to bias ourselves more towards the positive and hit the gas pedal when it appears as the sky is the limit. And, do we tend to shrug off downward projections without understanding the real implications of such a laissez-faire attitude? In either case, betting wrong has impacts.

Usually, if we do not appropriately anticipate and prepare for a downward trend, the typical after-the-fact response is the venerable Mode 1 stereotype: cut people, stop all discretionary spending, and slam on the brakes. It’s a no holds-barred knee-jerk response. Who has not been there before?

How would we have dealt with the most recent market collapse in 2008-2009 if we knew in 2007 that it was coming? We only get one attempt at each challenge, what can we learn about the past that can be applied going forward?

 

Think Advanced Maturity and Mode 2! 6 Steps to Success

The typical supply chain response to a downturn is to shut down factories, layoff production workers, cut orders on all suppliers, shut down future-focused improvement activities, etc. This approach impacts the ability to grow in the future.

What if we approached this differently? Does the lesson of IBM in the 1930s offer us a window to view an alternative scheme? Proactive strategies fall into the realm of “an ounce of prevention is worth a pound of cure.”

  1. Let’s start with talent. Watson hired well ahead of the curve in the 1930s. While admirable in the 20-20 hindsight view it is not always possible. CSCO’s should approach a potential downturn as an opportunity to retool the organization and to acquire skills that the supply chain knows it will need in the future. Instead of purely reacting to the “cut 10% of the HC” directive from the CFO, have a plan in place to retool the organization.

Downturns usually unleash a wave of excellent talent available to the market. Be prepared to reduce your team by more than the 10% target and then begin the acquisition plan once the dust has settled. The CEO and CFO will applaud the forward-thinking. In their eyes, you will still achieve the cost reduction targets but be in a much better position to accelerate when the upward trajectory resumes.

  1. Do you know where your supply and demand is? If you are a mature organization with strong supply chain analytics capability, you clearly do. If not, you are driving somewhat blind, looking back at what has been accomplished but with no sense of what is coming. Don’t wait to start because it will be too late.

Why not partner up with the IT team immediately and seek out some critical target areas for better information and analytics to support your supply decisions. Regardless of your areas of strength or weakness, diving in now before you are asked to change will put the CSCO in the driver’s seat in advance of any challenges for the typical Mode 1 “cut headcount, shut down factories, etc.” request later on.

  1. Don’t wait until there is no choice and be forced to shut down factories and lay off employees. With a strong S&OP process in hand, CSCO’s can begin to evaluate how to reset manufacturing earlier as signals begin to drop. Instead of all-in reductions in work force after the fact, production shifts can be slowly reduced ahead of time without impacting key performance metrics, especially customer service and cost – as they lead to major exposures in revenue and margin. Existing Gartner clients can read: Gartner’s Hierarchy of Supply Chain Metrics.
  2. What downturn has not been met without asking your supply base to do something? The usual suspects come to mind: take back inventory, delay and cancel purchase orders, extend payment terms, cut prices, and compromise well-nurtured supplier relationships. These are all so typical in their Mode 1 demeanor. We can be much better than that. Key suppliers should be viewed as partners – this changes the entire dynamic when challenges arise.

The CSCO or CPO knows that the suppliers see the same avalanche coming their way. There is no better time to dust off the supplier relationship program and evaluate the entire supply base than beforehand. Who is performing very well (cost, quality, delivery, innovation)? Is it possible to shift more supply to these top-performers, especially in multi-sourced categories now? Have we lived with 3 or more suppliers in certain categories when, in reality, 2 is sufficient? It is very important to consider the myriad options ahead of time than to be stuck with a limited, mode 1 playbook later on.

  1. Risky Business! Yes, there is always the issue of risk with a more consolidated supply base, but what is more important now – cost optimization or overall risk? When we talk about risk-making and decisions, the CSCO must know what she is getting into. By understanding what data and intelligence exist about past downturns, the CSCO and CPO can make informed, low-risk decisions today instead executing a reactive response tomorrow.

Engaging top suppliers early demonstrates the trust and confidence the supply team has and creates enduring goodwill. Mutually advantageous strategies can be developed and called into action at the right time. We may be wrong about the projected situation but one might argue you’ll be better off by taking a Mode 2 approach. It’s only bad risk when you have no data or experience to judge with.

  1. You’re not alone in this – what opportunities are lurking? Take advantage of this and realize there are a number of ways for you to do so. First, you have colleagues in the same impending mess as you. Sharing experience and issues allows you to test ideas and find out from others what is or isn’t working for them. Gartner’s exclusive network of diverse and experienced supply chain executives provides an excellent opportunity to talk to someone who understands. Peer networking continues to be the most sought-after element of a CSCO’s repertoire with Gartner.

Next, look ahead of you in your value chain – you will see are customers in the same predicament. A truly orchestrated supply and value chain means that these upstream conversations already occur naturally and are an important facet of everyday supply chain engagement. Ask them about what they see, what they are considering and, you’ll find ideas to help key parts of your supply chain be ready in a holistic manner.

 

Check your mode, now.

Are you thinking ahead and considering innovative and unique ways to persevere through difficult times working out scenarios of what might be? How will you be prepared to respond? Will you wait before you plan on a response tactic? Or, will you lead the charge and start now – ready to pounce on the opportunities that will present themselves while the rest of the pack gets washed ashore? What knowledge assets do you have at your disposal to test ideas against?

 If you are interested in learning more, please go to Gartner’s Supply Chain page or contact me via LinkedIn.

 

If we don’t learn from our past, we are bound to repeat the same mistakes over again.

Michael Massetti is an Executive Partner with Gartner who really does enjoy being a supply chain professional! Seriously. All opinions are my own.

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So, you really enjoy being a supply chain professional? Part 4

Resolve to Reduce Your Risk with Resilience, Really!

 Risk Dice

Let’s face it, managing a global supply chain is a fascinating and pressure-filled profession. We learned a long time ago that chains are only as strong as their weakest link. If it weren’t for the myriad ways that your supply lines could be disrupted without a moment’s notice, we’d all sleep a lot better! Don’t you wonder sometimes how and why you got into this field?

This fourth article will look at the challenge that is managing risk – from systematic solutions to the unintentional roll of the dice we often take.

Weakest-Link

Chains are only as strong as their “weakest link.” Telecommunications has it right. Fault-tolerant networks rarely fail. Do you have a supply chain or supply network?

True, chains are only as strong as their weakest link. Why do we even call what we have a supply “chain?” Do we ever settle for a supply “chain” without understanding the risks to our business without some level of protection of a “network?”

Fault-tolerance is a concept that has been used in telecommunications, airplanes, and space missions for many years. Even the simple spare tire in your automobile is some degree of risk management and fault tolerance.

Procurement professionals ponder the merits of multiple source strategies from both a pricing and supply risk perspective. But there are times when a sole-source is the only practical path. In many electronic devices, there are sole-sourced parts that are critical to the function of that device – just consider “Intel Inside” of the PC market for years, with few viable options, if any. Can your supply chain tolerate that risk?

With a multiple source strategy, there are fewer individual disruptions that, when they occur, can affect your company’s supply. This is one degree of redundancy that provides some fault tolerance. Supply chain professionals need to look up and down their entire “chain” from raw material inputs to their suppliers, through all levels of manufacturing, warehousing, and global distribution to ensure the right level of end-to-end risk avoidance is in place.

As a long-time cyclist, I always carry at least two spare tubes, a patch kit, and plenty of CO2 cartridges to repair any possible flats during the ride!

 

Supply disruptions will always occur at the worst possible time to your most important customer on your least flexible product when you least expect it. Think Boy Scouts “Be Prepared!

Supply Network

The 18-month stretch from mid-2010 through the end of 2011 was “one for the ages” when it came to uncontrollable and “unknowable” global supply chain risks.

It began (not so) innocently with the eruption of the Eyjafjallajökull volcano in Iceland in 2010. So, what impact can a silly volcano in Iceland have on the global supply chain?

Well, quite a lot. Most European air shipment channels were shut down for a week or more. It was rough sledding for my company during that stretch as our sole-sourced critical supply node was in Germany. It took a few days, but we got trucks to head southeast and eventually get shipments. Thankfully, we had buffer inventory in place.

Not to be undone, the massively devastating earthquake followed by the deadly tsunami in Japan hit in early 2011. The damage to the automobile industry just before the summer selling season was significant for several months.

Later on, after supply resumed, who had actually thought about and prepared for the fallout from radiation due to the damage at the nuclear power plant and the need to have materials inspected for radioactivity?

Last, but not least, in late summer, the monsoon rains in Thailand created floods that eclipsed the 100-year benchmarks that most flood plains are based upon. This disrupted nearly 40% of the global hard disk drive market for months as many of the supply nodes were under water, literally.

One very interesting juxtaposition of supply chain efficiency, just-in-time inventory policies, and overall supply chain risk played out during the latter two events.

A concentration of suppliers for the two industries developed over time – automobile components in the northern part of Japan and hard disk drives in central Thailand. This looks great from a supply chain efficiency angle as transit times between steps in the process are reduced, inventories can be kept leaner, and a pool of talent is developed (no pun intended).

However, the impact of the uncontrollable and unknowable was dramatic. An efficient supply chain on one day and a dramatic impact to global supply on the next. Both industries have done some major upgrades in their overall practices to reduce the potential impact in the future.

How lean is too lean when it comes to supply chain risk reduction and overall resilience? Are you prepared?

Don’t be an ostrich. Just because you can’t see it doesn’t mean it won’t affect you!

ostrich-head-In-Sand

Visibility is an essential element in risk planning and avoidance. Even events or risks that can be considered “unknowable” (like the exact timing of a devastating natural disaster) can be modeled and that intelligence deployed to your supply chain’s risk resilience assessment.

Sometimes, even internal practices that are very visible, when left alone, can open the door for a catastrophic impact due to an untimely event.

I’ve experienced some very skewed end-of-quarter delivery profiles in my career – very high risk when it comes to disruption susceptibility.

More than once we were faced with major typhoons running around Southeast Asia during the last week of our quarter. Timing-wise, we had to have all shipments out of the region by the end of the day on Friday in the US to have any real chance of revenue attainment for the quarter, which ended on Saturday at noon in the US (midnight in eastern continental Asia).

While I have no disastrous results to share, it did wake us up and probably had more of an impact to affecting the linearity in our quarterly shipments than any whining our supply chain and logistics group could muster. Even the CEO brought the topic up during the next end-of-quarter review.

 

Inflection points are only visible in the rear view mirror.

You don’t know until you know and then you know. Especially when it comes to a change in the curve – an inflection point in the trends.

InflectionPointEven with all the big data stories and the tremendous growth of analytics in supply chain, sometimes things change and you don’t know it until you know it.

The resilience of the supply chain depends considerably on the ability to detect and respond (react) to an inflection point. The strategies put in place to protect business are called into action when the need arises. The better prepared and more agile your supply chain is, the less the damage.

Written off as a fad in 2010 when Apple introduced the first iPad, two years later, the entire PC industry was reeling from the damage. The lack of serious attention given to that inflection in the personal device or computing market hit PC manufacturers and the rest of their supply chain very hard.

Further, the entire software model was disrupted. While “apps” had debuted with the iPhone (even the iPod Touch) a few years earlier, the entire software industry was impacted. Did anyone prepare for the impact of Angry Birds?

In the end, it’s all about preparation and detailed analysis of your entire supply network risk to determine whether or not you can weather the storm.

As the Boy Scouts of America have said for years, “Be Prepared!”

 

ciao…mam

Michael Massetti is an executive who really does enjoy being a supply chain professional! Lucent Technologies once took a risk on Michael and he’s been in supply chain ever since. Thanks to my former colleagues and partners in supply chain crime Joe Carson and Chris Armbruster for their ideas.

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